Online VCs – the future of Venture Capital?

As a result of a “no-action” letter from the SEC, FundersClub has become the first officially recognized online venture capital firm according to a recent article on the VentureBeat website. This type of online investing has been envisioned for some time but has been slow in developing, primarily because of regulatory issues. As noted in an early blog entry, equity crowdfunding is intended to accomplish a similar objective, supported by JOBS act of last year, but the SEC is still grappling with how to adequately protect investors in facilitating these types of online investments. The FundersClub approach avoids the issues with individual direct investment by consolidating investments into a single funding source for portfolio companies.

FundersClub is currently limiting its investments to companies being spun out of the Y Combinator incubator (FundersClub itself being a product of the incubator). While their approach may be somewhat unique, the precedent they have set could establish an entirely new marketplace for small investors and startups. Despite the recent no-action letter from the SEC, many financial industry experts believe the SEC may yet step in to regulate online VCs. However, until that happens, look for this market to develop rapidly as other jump in to follow FunderClub’s success in establishing this type of online venture capital businesses.